(January 25 – 17:40 ET) – The U.S. Securities and Exchange Commission’s Office of Compliance Inspections and Examinations issued a report today examining online brokers.

SEC staff decided to review online broker-dealers, “in light of the phenomenal increase in online trading in recent years”. The report describes the SEC’s general findings in areas such as disclosure, investor education, advertising, best execution, operational capability, security measures, and employee supervision. “The examinations revealed examples of sound practices as well as areas where some broker-dealers can enhance their practices,” says the SEC.

In particular, the study found that enhanced disclosure would solve many customer complaints. It suggests such initiatives as providing help screens on Web sites with explanations of key investing terms and concepts; taking steps to prevent executions of unintended duplicate orders; and providing enhanced margin disclosure, including a list of securities with higher margin requirements and the actual interest rate that will be charged on margin balances.

Online brokers could also describe the IPO allocation process; and inform customers with cash accounts of their trading liabilities.

The study also highlighted the importance of proper advertising, high quality order routing practices, the adequacy of systems and customer privacy and security. It also notes, “Firms should evaluate whether their supervisory procedures are adequate to monitor employees’ use of the Internet.”

Lori Richards, director of the Office of Compliance Inspections and Examinations, said, “As more investors trade online, it becomes ever more important for broker-dealers to ensure that their online systems are meeting the needs and expectations of investors. In highlighting issues we have seen in our examinations, I hope that this report will be helpful to all firms offering online trading.”
-IE Staff